Commentary on how China and the world are adapting to each other -- or not.

January 2011

January 17, 2011

CNN has posted a very good story by Katherine Dorsett about the emerging trend of Americans moving to China for work. Aside from being cited (thanks!), I provided some background info for the story. One piece of data I had a hard time locating is the actual number of foreigners, including Americans, who have work visas in China. I looked through some Chinese statistical yearbooks and the website of the Ministry of Public Security, but didn't find anything. I'm sure I just didn't look hard enough. If anyone comes across these figures, I'd welcome you passing them along.

One small data point I did find, but not directly relevant to this story, concerns the rapid rise in tourist visitors.

That is a 12.5 fold increase in the number of foreigners overall and 7.4 fold jump in number of American visitors.

Preparations for Wednesday’s state visit by Hu Jintao have been underway for several months. Most of that time was spent negotiating over what deals would be reached, whether there would be a joint statement, and what food would be served. I’m particularly interested to see: 1) Whether Chinese first lady Liu Yongqing will eat the standard fare put on the table for everyone else. She typically travels with her own chef and food; and 2) Whether the American media will get a good photo of the back of Hu Jintao’s head to determine once and for all if he has a bald spot. Chinese media are forbidden to ever shoot him from behind. CNN, please…

In actuality, one of the most interesting turns of the past week has been the contrasting positioning the American and Chinese sides have adopted.

President Obama sent out his four department chiefs in charge of foreign policy to give China-specific speeches. Secretary of Defense Gates, Secretary of Treasury Geithner, Secretary of Commerce Locke, and Secretary of State Clinton all sang the same tune: The United States and China are very different, and China needs to adapt its behavior, if not its views, in order for it to be accepted as a member of mainstream international society.

Secretary Gates focused on China’s military build-up and the PLA’s limited transparency, while Geither and Locke focused on a variety of Chinese market barriers, from the Renminbi’s value to indigenous innovation policies, that put American firms at a disadvantage in China and elsewhere. But it was Secretary of State Hillary Clinton’s address, the last of the four, which brought all of the various components together in one coherent and complete message.

Her statement had a clear logical coherence to it: The US and China are different > The United States is the steward of international society > International society is built on multilateral institutions > China is still not a full member of international society > China must change its security, economic, and human rights policy to come into compliance with its international obligations, which is for its own good and the good of the rest of the world > Mutual trust can only be built by China taking concrete steps to adopt these changes.

A few examples:

The US and China have differences:

“We are two complex nations with very different histories, with profoundly different political systems and outlooks.”

“To keep our relationship on a positive trajectory, we also have to be honest about our differences. We will address them firmly and decisively as we pursue the urgent work we have to do together. And we have to avoid unrealistic expectations that can be disappointed. This requires steady effort over time to expand the areas where we cooperate and to narrow the areas where we diverge, while holding firm to our respective values.”

Trust depends on action:

“The success of the relationship depends on its ability to deliver positive results to the people of both our nations, first and foremost, but also to the rest of the world.”

China must act in the context of international institutions:

“Embracing the obligations that come with being a 21st century power will help to realize a future that will give the Chinese people even more, in fact, unimagined opportunities. But that means accepting a share of the burden of solving common problems, abiding by and helping to shape a rules-based international order.”

In its stress on differences and the importance of multilateral institutions, the Obama Administration’s tone is quite different from that of the previous administration of George W. Bush. Certainly the US has not forsaken power politics, but Secretary Clinton’s speech was entirely consistent with the liberal internationalist school of international relations theory. The final giveaway was her not so subtle attack against realism:

“In the 21st century, it does not make sense to apply zero-sum 19th century theories of how major powers interact. We are moving through uncharted territory. We need new ways of understanding the shifting dynamics of the international landscape, a landscape marked by emerging centers of influence, but also by non-traditional, even non-state actors, and the unprecedented challenges and opportunities created by globalization. This is a fact that we believe is especially applicable to the U.S-China relationship. Our engagement – indeed, I would say our entanglement – can only be understood in the context of this new and more complicated landscape.”

Why has the US decided to emphasize differences in the run-up to the visit?

For one, in the wake of the financial crisis China appears to have calculated that it could be more assertive in a number of policy areas, and this new found confidence was exhibited across the policy spectrum, and highlighted the different positions of the US and China. In the last year it has become clear China overstepped. That has led to a backlash by China’s neighbors, and the US has capitalized on this uneasiness. Its relationships with countries around China, save North Korea, are increasingly robust. Hence, the US is surprisingly in a position of strength against China.

Second, although President Obama’s domestic political standing has risen of late, he cannot be seen to coddle the Chinese on any issue lest he make himself vulnerable to attacks about being weak on defense, not defending American jobs, or sacrificing American values. If the visit were in Beijing, American rhetoric may not have been as strident.

And third, President Hu’s political fortunes are most assuredly on the downswing. He has another 21 months as Party Secretary and 26 months as president, and the clock is ticking. Although he has led China to be more assertive, he also likely does not want to be seen as having wrecked the relationship. The US side may be gambling that the best defense against a Chinese leader on the way out is a good offense.

The Obama Administration’s approach not only differs from W’s but also from that of the Chinese side. In response to written questions from the Washington Post and Wall Street Journal, Hu Jintao stressed the common interests of both countries. His grammar was the reverse of Secretary Clinton’s: We may have some differences, but our common interests are so clear that the two countries must cooperate. Moreover, his description of China took it as a given that China is a leading global power and a central member of the international system, and such standing is not conditional on US approval.

“China and the United States have major influence in international affairs and shoulder important responsibilities in upholding world peace and promoting common development. Under the new circumstances, the common interests of our two countries have been growing and areas of cooperation expanding. There is great potential for our mutually beneficial cooperation both in advancing Asia-Pacific regional cooperation and in improving global economic governance and promoting sustainable growth of the world economy; both in expanding cooperation in economy and trade and in strengthening cooperation in new areas like new energy sources, clean energy, infrastructure development and aviation and space; and both in fighting terrorism and preventing the proliferation of weapons of mass destruction and in meeting challenges like natural disasters, food security and major communicable diseases.”

It will be fascinating to see if the two sides’ pre-summit approaches carry over to the visit itself. Not only will I be watching to see what is on Ms. Liu’s plate, I’ll be anxiously listening to the toasts of two presidents. Ganbei!

January 14, 2011

The US Information Technology Office (USITO) in Beijing is looking to expand their staff by hiring a Policy Manager (Download Policy Manager JD) and Senior Policy Director (Download Senior Policy Director JD). I've followed USITO since its very early days in the 1990's, and the organization has become an integral part of the policy process in China for information technology.

Robert Putnam of Harvard is famous for his theory about "two-level games," in which negotiations between national governments are affected the internal negotiations each side has with their own domestic industry. USITO is a living, breathing example that shows how outdated Putnam's two-level games are. Although representing primarily American industry, USITO is in direct contact with the Chinese government and local industry on a regular basis.

Just fyi, this post is meant as a public service announcement and not as an endorsement.

January 13, 2011

It's time once again to present the best ideas money need not buy for how to make it big in China. Each year I teach a class with the boring title, "China's Political Economy." Surprise of surprises, rather than a pedestrian stroll around the various aspects of China's economy, the policy process, WTO, IPR, etc., the students have one task: give me a proposal on how to invest a billion bucks in China. That is $1,000,000,000.00. For folks like Bill Gates and Warren Buffett -- and perhaps some of you readers out there -- this is pocket change. But for students -- and professors -- at Indiana University, this is a lot of dough. And, in fact, a billion dollars can go a long way in investing in China. Whether motivated by the idea of a big bank account, the shear thrill of the challenge, or figuring out how to go from the abstract to the practical (“let’s build a guanxi wang”), my students produced some fantastic proposals which the world deserves to see.

Before unveiling this year’s best of the best (here is last year’s), let me explain how the class was structured. The students examined, in order, the economic, policy, and political risks associated with doing business in and with China. They first did research on a wide number of industries, from tea to telephones, from waste water management to airlines. They then analyzed all the various types of policies the Chinese central and local governments could throw up in their way to complicate things, including Indigenous Innovation incentives and obstacles, M&A reviews, antidumping and safeguard duties, RMB manipulation, etc. And then they considered the business ramifications of China's political environment -- corruption, inter-provincial protectionism, limited policy transparency, labor unrest, etc.

The class syllabus (Download SYLL CPE F10) is full of terrific case studies and broad analyses written by journalists, lawyers, academics, and investors. Students particularly enjoyed Tim Clissold’s story of eating deer whip in Liaoning. Another highlight was the utterly hilarious and insightful documentary China or Bust! (2008), which tells the story of three British businessmen who go to China in pursuit of fortune. The three were each terrific characters, and the outcomes of their efforts were highly unexpected.

My students’ investment proposals mirror the path of the class and culminate with an Action Plan of how to invest their billion and a discussion of the steps they’ll take to address the various risks they are most likely to face. And the winners are . . .

Matt Laury, a senior in the IU’s Kelley School of Business, suggests in his proposal ( Download Laury Proposal) taking advantage of China’s growing consumer power by investing in Univer’s Lipton brand and the Yum! Corporation’s chain of restaurants. He is most concerned about risks related to China’s financial system, protection of trademarks, health regulations, and labor unrest in their operations. He has reasonable suggestions for how to deal with each of these risks.

Nick Leish, also an IU Kelley School student, takes a very different tact ( Download Leish Proposal). Whereas many are decrying the heavy hand of the Chinese state and calling for greater liberalization – just see Treasury Secretary Geithner’s speech at Johns Hopkins-SAIS yesterday – Nick suggests taking advantage of extensive government intervention by investing in the stocks of several leading Chinese companies (I hate the term “national champions”): GCL Poly, Sun Tech, China Mobile, and China Unicom. His strategy is consistent with the age-old motto: If you can’t beat ‘em, join ‘em. And isn't that why these and other Chinese companies list outside China?

And Jim Nagler, a Master’s student in East Asian studies, suggests yet another avenue ( Download Nagler Proposal) by proposing that investors fund a start-up human genome R&D facility. He identified several leading Chinese genome research outfits, including the Beijing Genome Institute (BGI), and believes that if the start-up does well enough it could eventually merge with BGI or form some sort of strategic partnership. He suggests it be located in the Suzhou Industrial Park to take advantage of the large talent pool of university graduates and researchers in Jiangsu, Shanghai, and Zhejiang.

When you read these, please remember that the proposals are for a political economy course, not a class in business management, entrepreneurship, or accounting. The overriding purpose is to use the investment proposal as a vehicle to better understand the interaction of economic, political, and international factors in China. Don’t be disappointed for the lack of indepth marketing research or detailed budgeting. Instead, enjoy the boldness of the ideas, the dreaming, and how they are justified in light of China’s broader social and political milieu.

And if you really like these ideas, please let us know. And if you want to use any of them, feel free. We’re happy to take any credit (and a fee – ha, ha) if things turn out well but none of the responsibility if things go poorly.

January 12, 2011

Apparently the Communist Party's Propaganda Department has issued an order banning domestic media from using the term "civil society" in their reporting. David Bandurski, writing for the China Media Project, shows that this order is being obeyed by the most official of official media, such as People's Daily, but is not by more independent outlets, such as the 21st Century Economic Herald. Scholars are also still using the term in academic papers.

One interesting aspect of this apparent ban is that it has focused on only one of the three different ways one can say civil society in Chinese, "gongmin shehui" (公民社会). Gongmin shehui could be translated as "citizen" society or, better, civic society. It refers to those members of society who are publicly engaged, often in the political process itself. But there are two other ways to say civil society in Chinese that haven't been banned. "Shimin shehui" (市民社会) literally means "urbanite society" (I'm sure there is a better translation that escapes me right now), and is most consistent with the notion of civil society being the product of capitalists and urban dwellers to create horizontal social ties and cooperative organizations to protect their interests, either against competitors or the state. Think industry associations, chambers of commerce, etc. Finally there is "minjian shehui" (民间社会), which most literally translates as "civilian society," that is, members of society collaborating with each other to form all types of organizations that are independent of state control. This would include anything from industry bodies to non-governmental organizations (NGO's) aimed to help those HIV or other marginalized groups.

If the reports are correct, this is a glass half-empty/half-full story. Propaganda officials are most worried about groups that are inherently politically oriented -- no duh -- but they are less concerned about business-related groups and other types of NGO's geared to address practical problems. If so, this effort at word control would actually imply some progress in terms of being more accommodating to the wide swath of NGO's that are the least politically threatening. Originally, it seemed the Party's view was that any group, even marble clubs and qigong groups, could potentially be threatening; but perhaps now there is a greater willingness to differentiate amongst organizations.

Reading between the lines more, this may mean China is getting ready to move on adopting new regulations related to at least industry associations and perhaps even to a broader group of NGO's. Now in the works for several years, a new set of regulations would be quite welcome and most likely represent a significant improvement over the current regulatory environment.

We'll just have to see whether the word games now being played are part of a larger policy shift, and if so, in which direction.

January 10, 2011

Data for 2010 is starting to come in, and China's merchandise trade surplus was $183.1 billion, according to Chinese customs. Assuming China's GDP grew 9% in 2010, to about $5.46 trillion, that would mean China's trade surplus was equivalent to 3.4% of its GDP. That is way down from the skyrocketing 7-11% range of 2006-08.

The US now finds itself in a dilemma. Both Democrats and Republicans have been critical of China's large overall and bilateral trade surpluses and accumulation of foreign exchange reserves, arguing that these imbalance were contributing to a slower recovery in the American economy and elsewhere. Hence, the pressure of the RMB to appreciate, a growing number of bilateral and WTO trade cases, and even changes in American monetary policy to effectively weaken the dollar (and strengthen the RMB). At the Fall G-20 meeting, US Treasury Secretary Geitner pushed for an agreement in which countries would commit to keep their international economic activities in rough balance, including not having trade surpluses above 4% of GDP. I suspect he got that 4% from Chinese officials who had publicly stated that they themselves had this 4% goal in mind. Despite the underlying consensus, no such agreement was reached at the G-20, and calls for continued bilateral and multilateral pressure continued.

Now the US is in an uncomfortable position: China has apparently met the broader goal of lowering its overall trade imbalances, but it still has a very large bilateral surplus with the US and the RMB has appreciated 2-3% against the dollar since the summer. In addition, although there has been some improvement in US employment data (down to 9.4%), that is still a high figure and economic growth is still extremely sluggish.

When President Hu Jintao arrives for his state visit next week, it will be decidedly difficulty for President Obama and his team to continue to pressure China with much authority. To the contrary, one might expect President Hu to seek recognition from the US side that it, in fact, has done much to reduce global imbalances, fulfilling its obligations as a "responsible stakeholder," and moreover, it's now the US's turn to chip in -- get control of its budget deficit, increase savings, and facilitate greater long-term economic growth. He might even push President Obama to publicly praise China.

Will this happen? Probably not. Given a weak US recovery, the continued large bilateral deficit (particularly as a percentage of the overall US trade deficit), and serious complaints from American multinationals about China's business environment, I wouldn't expect the US to declare victory next week. President Obama may offer some kind words on the economic front, but if so, they will be part of a longer sentence in which the main phrase is about the need for more progress, as in, "The US welcomes China's lower global trade surplus, but this improvement needs to be accompanied by a range of other substantial changes." We shall see.